Time to Reconsider Free Trade
The United States has been the world's primary exponent of free trade for over a century. For much of that time, free trade served our interests well: as tariffs and other barriers came down, growth in global trade helped to fuel economic expansion and job growth here at home.
But the acceleration of globalization has changed the dynamics of trade. Our annual trade deficit, adjusted for inflation, has increased from $169.7 billion in 1990 to approximately $630 billion in 2010. Meanwhile, annual GDP growth is lagging, our manufacturing base has been decimated and incomes are stagnant or falling.
The ability to sustain a vibrant manufacturing base is dependent upon the availability of capital, access to management and process expertise and cost-efficient labor. In the past, the United States held a decisive advantage in all but the labor-cost part of that equation. Now, with the help of our own financial and manufacturing firms, our competitors have erased those advantages.
A key factor in our growing trade disadvantage is that most of our leading manufacturing companies have gone multi-national. Last year, Caterpillar, long one of America's leading exporters, filled fewer than half of its 15,000 global new jobs here at home. Now, Caterpillar manufactures much of its equipment in countries like Brazil, India and China. Much of that is exported to countries around the world. Though some of Caterpillar's profit does flow back to the United States, much of it is reinvested abroad.
It is ironic that we currently borrow billions from our trading partners in order to provide a social safety net for precisely those manufacturing workers who are displaced by globalization.
Perhaps it's time to ask if we might not be better off to derive that money from tariffs on imported products instead of borrowing it from the same countries whose products displaced the workers in the first place.
The classical argument against tariffs is that they will spark a retaliatory trade war. But since the world's demand for our products and services is already so much lower than our demand for cheap imports, it might be time to re-evaluate our devotion to free trade policies that, unbridled, logically lead to an ever-declining domestic standard of living.
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Comments :
May '10
Re: Time to Reconsider Free Trade
I don't know if you are being tongue-in-cheek or serious, but I'd certainly be in favor of reconsidering how we conduct "free" trade. (It's not really "free" when the other side, and times our side, is subsidizing industries, etc.).
Edited on Jan 19, 2011 at 3:18pmJul '10
Re: Time to Reconsider Free Trade
Oh, I am very serious.
By the way, Chris, did you happen to grow up in Fresno?
Nov '10
Re: Time to Reconsider Free Trade
Certainly revisiting free trade - to tighten up the rules - would be useful, but has the side effect of protecting unions and mismanaged companies. Perhaps more practical would be cleaning up the credit markets that encourage excessive consumer spending. I really don't know, it's just something to think about.
Jul '10
Re: Time to Reconsider Free Trade
It is a very complicated issue. But, with the negative impact of globalization upon American workers being so severe, it is appropriate that we question trade policies going back a hundred years.
Some people would argue that the benefits to American consumers outweigh the deleterious effects of globalization. Others might argue that widespread unemployment and stagnant incomes are high prices to pay for a cheap spatula.
Re: Time to Reconsider Free Trade
Kenneth, I think you have the right diagnosis but the wrong solution. Labor costs are rarely the main driver of factory-siting decisions--particularly with complex, higher-margin products. Far more important are tax rates, regulatory policies and future expectations. The problem is that the US environment is bad and likely to get much worse, shunting productive investment elsewhere. Consider that the US has the highest corporate tax rate in the industrialized world (one can argue whether or not Japan just edges us out, but considering Japan's "lost decade" of economic growth, this rather underscores the point), a policy of making energy more expensive and supply more uncertain, lengthening regulatory review cycles for "environmental impact"--even retroactive disapproval years after an approval is granted--and escalating employee costs unrelated to productivity (ObamaCare). And this is before the EPA issues its promised new carbon dioxide cap-and-trade rules.
The only businesses welcome in the United States seem to be those that make no intrinsic sense. And even those are relocating.
Boiling this down, other countries are wooing entrepreneurs, treating them like a resource, while the United States treats them as a threat or source of spreading the wealth.
Edited on Jan 19, 2011 at 3:53pmJul '10
Re: Time to Reconsider Free Trade
But George, how do we then explain why Apple makes all its products abroad? Those are complex, high-margin products.
I'm not arguing with you here, I'm just seeking clarification.
I agree that U.S. taxation and regulation costs are job-killers, but in my simple mind, I just foresee that globalization ultimately leads to a "global wage" that's far, far lower than Americans are accustomed to.
Dec '10
Re: Time to Reconsider Free Trade
There is no Free Trade, because there is only one America, as a trading partner.
When I work for an industry, I put great effort into establishing sources and recipients, evaluating their waste streams. In 1992, I had a plan put together to get my arms around a military base and went to order some specially made nets that fit into my sampling protocol, as EPA approved. I could not get American made nets, or even fishing line. By that time, there was not a plastic product manufactured that I could order, from an American manufacturer.
We are the best at what we do and we are not allowed to do it. I spend my time cleaning and honing American industry where I can, while we all buy our products from places where they throw their waste in the ditch, out back. I have to win my jobs through competitive bids, but my customers don't really care if I save them money. I try to actually make them money, by showing them where they are inefficient, but they are just biding their time, until they can move to where they can throw their waste in the ditch, out back.
Re: Time to Reconsider Free Trade
Item 1: If Apple builds computers in California, the company's gross profit is subject to a 45% state+federal income tax. If the computers are built by a subsidiary in China, then the US rate applies only to the difference between the retail price and the transfer price paid to said subsidiary, and only for those devices sold into the US market. The tax rate paid to China is negotiated--certainly far lower than the US levy. In its most recent quarter, Apple's worldwide effective tax rate was 24.6%. If it based its manufacturing in the US, Apple's corporate tax rate would be at least 35%
Item 2: Apple can easily expand in China. Building a semiconductor fab in the United States takes years--the environmental review is a nearly impossible hurdle in California, and subject to future water and power cutoffs. Obama's EPA is likely to make any energy-consuming firm a target
More in next post
Re: Time to Reconsider Free Trade
A few more numbers are necessary to underscore the impact of income taxation on corporate decision making.
Let's assume that Apple chose China over Texas, a state with no corporate income tax, for building computers. Apples effective WW tax rate is 24.6% versus 35% in the US. The 10.4% differential this quarter is worth $830M cash saved in taxes--$3.32 billion annually. Here's where it gets interesting: multiplying this $3.32b times Apples price-to-earnings ratio (22.37) yields a $74.3 billion swing in Apples market capitalization.
In summary, all else being equal, it will cost Apple shareholders at least $74.3 billion to manufacture in the United States, even if labor costs are identical and the state and federal governments are rolling out the red carpet for the company's expansion, which is most assuredly not the case.
And even if Apple were patriotic enough to eat the cost, then some enterprising takeover artist might be able to buy the company for full value and become rich by shutting down the US plants and moving operations to China.
Even worse, small US businesses can't move to China: they're stuffed.
Jul '10
Re: Time to Reconsider Free Trade
George, I used to work in the fashion industry. Some of my friends still do. Absolutely none of them now manufacture in the United States - they all manufacture in Asian countries. Product development happens here, but everything else happens overseas.
Most of those manufacturers source their fabrics and leathers in places like Argentina or Pakistan and ship them to China or Vietnam for assembly into finished products. I even know of a few that import raw leather from Argentina to Italy, process it, send it to China and then import the finished product home. Although they pay shipping charges three separate times, their landed costs of finished product in the U.S. are still far, far lower than the cost of producing the product here, due to lower labor costs abroad.
Think about that: the shoes you buy tomorrow could be made from cowhides sourced in Argentina, shipped to Milan for processing, then shipped to Shanghai to be crafted into the final product, which is then shipped back to Los Angeles. And, due to lower labor costs throughout the supply chain, the final product couldn't be produced in the U.S. for twice the price.
Edited on Jan 19, 2011 at 5:27pmRe: Time to Reconsider Free Trade
Want to make globalization work for us? Eliminate the US corporate income tax. The immediate revenue cost would be about $140 billion, but that's before the deluge of companies relocating to our shores.
Jul '10
Re: Time to Reconsider Free Trade
George, although I am 100% for a zero rate of corporate income tax, I'm not sure that addresses the problem of disparate global labor costs.
Whether a company manufactures here in the U.S. or abroad, it's still going to be subject taxes on its profits. True, some global companies can reduce their effective U.S. tax rates by not repatriating profits, but that means those profits don't get invested here to create jobs - they get invested abroad to perpetuate the spiral of globalization.
Re: Time to Reconsider Free Trade
Everything won't be made in the US, nor should it be. Comparative advantage, including low labor costs will still prevail in many instances. However, the overwhelmingly automated assembly of high-margin electronic products is just one example of products that used to be US made but aren't since the rest of the world dramatically lowered corporate tax rates during the 1990s.
Jul '10
Re: Time to Reconsider Free Trade
Is that all we collect in corporate income taxes? What's that? Maybe five percent of federal revenue?
Kill it. Kill it now.
Aug '10
Re: Time to Reconsider Free Trade
What about the effect that tariffs have on standard of living?
Don't tariffs mean that consumers cannot get what they want as cheaply? That they must either do without or pay a higher price? That doesn't sound so good for standard of living to me.
My hunches are with Doc Savage on this one.
Jul '10
Re: Time to Reconsider Free Trade
George, you're much smarter than I on this issue. But let me ask this: what would be the harm of going to zero corporate income tax and imposing tariffs on imported goods?
Aug '10
Re: Time to Reconsider Free Trade
George Savage
Everything won't be made in the US, nor should it be. Comparative advantage, including low labor costs will still prevail in many instances. However, the overwhelmingly automated assembly of high-margin electronic products is just one example of products that used to be US made but aren't since the rest of the world dramatically lowered corporate tax rates during the 1990s. · Jan 19 at 5:33pm
Doc, I think you'll enjoy this music video.
Edited on Jan 19, 2011 at 5:45pmJul '10
Re: Time to Reconsider Free Trade
Midget Faded Rattlesnake
What about the effect that tariffs have on standard of living?
Don't tariffs mean that consumers cannot get what they want as cheaply? That they must either do without or pay a higher price? That doesn't sound so good for standard of living to me.
My hunches are with Doc Savage on this one. · Jan 19 at 5:36pm
Well, Midge, that's what's known as the Wal-Mart argument: that the lower retail prices of goods counter-balances the lower wages and unemployment that result from importing those goods.
I would maintain that as domestic incomes decline in the face of lower global wages and domestic unemployment rises as a result of a declining manufacturing base, fewer people here can afford those cheaper goods.
Jul '10
Re: Time to Reconsider Free Trade
Kenneth
But George, how do we then explain why Apple makes all its products abroad? Those are complex, high-margin products.
I'm not arguing with you here, I'm just seeking clarification.
...
Apple engineers those products in Cupertino, CA. They have history there and the workforce there understands Macs and iPhones as cultural icons. Tech employees do not organize and Northern California has a tech savvy labor force hard to replace at their price in the global market.
Apple's corporate logistics are in Austin, TX. Lower expenses. Manufacturing is in China, no OSHA, no ADA, no NLRB, no ObamaCare, no next painful surprise. The manufacturing piece is huge, and when held to their contracts Chinese provide quality. And quality parts suppliers are closer. And they can still deliver my laptop order within 24 hours of the order from Shanghai to DC, and this town is littered with Apple Stores when the stuff don't work.
Re: Time to Reconsider Free Trade
Tariff increases would be fine if we could assume that other countries wouldn't retaliate with escalating tariffs of their own. The experience of the 1930s tells me that retaliation is inevitable and likely to escalate, with dangerous consequences.
People understand prices, and when a foreign government artificially puts up prices and puts locals out of business, politicians react. As we see, income taxes are not nearly so well understood. The rest of the world dramatically cut income tax rates during the 1990s without any retaliation by the United States, providing a distinct advantage to foreign domiciled firms. The recent Kyoto accord and the rest of the global warming falderal is just another non-tariff attempt by foreign governments to put the United States at a disadvantage.
Where Vietnam and China have a natural competitive advantage, then let them win. Tariffs seem immoral to me here. But where we have the natural comparative advantage, systematically hamstringing ourselves to the benefit of our foreign competitors is nonsensical...and worse.